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You can't fight City Hall, but you can fight Wall Street -- at least that's what Annie Bell Adams hopes.

When the U.S. pensioner lost her home to foreclosure, she could have easily done what so many others have: swallowed hard, accepted her fate, and moved on. After all, what else are you supposed to do when a Wall Street megabank tells you that you don't own your home anymore?

If you're Adams, you do what many Americans do when all else fails: sue.

The Financial Times is reporting that Adams, along with four co-plaintiffs, has filed suit against 12 of the biggest banks in the world, including Bank of America (BAC), alleging that manipulation of the LIBOR rate caused their mortgage payments to be much higher than they otherwise would have been.

LIBOR (pronounced LIE-bore) stands for London Interbank Offered Rate, and is the average rate at which the biggest U.S. and European banks can lend money to each other. Rates are reported by the participating banks each morning, and the LIBOR is made public at 11:45 a.m. GMT each day.

Over the summer, allegations emerged that bankers had manipulated LIBOR in the run-up to and during the financial crisis. British superbank Barclays (BCS) was the first bank to be publicly reprimanded because of it -- suffering a fine of $450 million at the hands of American and British regulators, and seeing CEO Bob Diamond sent packing in the process.

But if Adams' suit is any indication, Barclays won't be the last bank to feel the pain.

Here's how LIBOR Affects Your Wallet

If you don't remember the LIBOR scandal with much clarity, don't be too hard on yourself. Bank scandals have been hitting the headlines with a renewed vigor lately. And as banking scandals go, the LIBOR uproar may have seemed a bit arcane and too inside-the-industry, leaving the average observer thinking that it wasn't an issue for them.

Nothing could be further from the truth.

LIBOR is important to consumers everywhere because it's the daily reference rate at which trillions in dollars of financial instruments are issued. (One estimate places the total at $360 trillion.) If you have a credit card, chances are the rate you pay is based on LIBOR; same thing for small-business loans and student loans.

Most important for our purposes here, LIBOR is the rate used in the issuance of adjustable-rate mortgages. Typically these rates are indexed along the lines of "LIBOR plus 2%" or the like.

This is exactly the kind of adjustable-rate mortgage that Adams and her co-plaintiffs held, and that are front and center in their complaint. According to the Financial Times, their suit alleges in particular that bankers at the 12 institutions in question "were incentivized to manipulate the London interbank offered rate to a higher rate on certain dates on which adjustable mortgage interest rates were reset."

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Following months of public outcry, and much hand-wringing on the part of politicians and bureaucrats on both sides of the Atlantic, at the end of September, the British Bankers' Association formally ceded control of LIBOR to British government oversight. The LIBOR will now receive what U.K.'s Financial Services Authority Managing Director Martin Wheatley is calling "a complete overhaul." The BBA had overseen the LIBOR since its first use in 1986.

But a new and improved LIBOR is neither here nor there for Annie Bell Adams and her co-plaintiffs. They have a legitimate gripe, and this suit could be just the beginning of more like it. When will the first LIBOR manipulation suit for credit card rates appear? Or for student loans? It's estimated that Adams' class action suit alone could draw up to 100,000 additional plaintiffs.

Four years after the financial crash, the world's big banks can't quite get away from the trouble they caused. Just ask the lawyers gearing for Annie Bell Adams' lawsuit.

John Grgurich is a regular contributor to The Motley Fool, and owns no shares of Bank of America. The Motley Fool owns shares of Bank of America. Follow John's dispatches from the bleeding edge of capitalism on Twitter @TMFGrgurich.

7 Comments

the banks forced people to buy big homes that they couldn't afford?It takes two parties signature to make a loan happen.....

Sure, the banks are angels by any means....but it took the greed of both parties to make it happen. That is the nature of a speculative bubble,,,, almost everybody buys into it, and only a few can see the obvious.

I didn't borrow money to buy a big home that I couldn't afford, and I don't have any debt problems what so ever.I have no plans to sue any banks over Libor, or variable rate loans.....

But I did have a variable rate loan, when interest rates were falling.....then locked them in fixed at a very low rate.... and the house is now paid off...

But my house value did fall, because of the people forced to sell drove down house prices in the area....